Mutual Funds

My last two posts covered the concept of risk and the concept of diversification to mitigate risk while investing. If you are not (or don't want to be) an active investor that needs to watch many different investments in a diversified portfolio, one way you can still achieve some diversification is through investing in mutual funds.

The U.S. Securities and Exchange Commission (SEC) defines a mutual fund as "a company that brings together money from many people and invests it in stocks, bonds or other assets. The combined holdings of stocks, bonds or other assets the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holding."

Mutual funds will each have an investment philosophy, such as large cap stocks, corporate bonds, etc. Beyond that, however, it will diversify within that investment class. So, buying into a mutual fund should get you diversification within that mutual fund's investment class(es). Buying into mutual funds that have different investment philosophies will get you even greater diversification.

However, there are many mutual funds and a lot of different terms and ideas to understand before you invest. Here are two resources to help do the research:

• The SEC's introduction to mutual funds can be found here.
• Motley Fool has a glossary which they tout as "mutual fundese translated for the masses" which can be found here.